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Investors drawn to high-yield emerging market bonds

Monday, May 22, 2017

Subject

Emerging market corporate bonds enter bubble territory.

Significance

Strong appetite for higher-yielding emerging market (EM) assets this year has compressed corporate bond spreads the most since the global financial crisis, fuelling concerns of a bubble. The sharpest compression has occurred in Asia where spreads on the Asian component of JPMorgan’s benchmark EM corporate bond index have fallen below their mid-2014 post-crisis low. Low volatility and the enduring ‘search for yield’ are underpinning demand but the scope for a correction is increasing as valuations are increasingly stretched -- particularly in Asian high-yield, and in non-investment grade bonds -- while concerns are high about China’s crackdown on financial leverage.

Impacts

  • The dollar has erased its post-election gain; it may fall more in coming weeks.
  • The oil price has risen 10% since May 9 on rising confidence that OPEC will extend output cuts but further increases will be limited.
  • The ‘Vix’ equities volatility index, Wall Street’s ‘fear gauge’, is close to a historic low despite the political turmoil in Washington.
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